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How 529 College Savings Plans Work
The best thing to happen to college savings in the last several years is the 529 plan, a tax-advantaged savings plan for a child or grandchild to pay for qualified education costs.
How the Plans Work
Once on the 529 plan, assets build up tax-free until they're withdrawn. Withdrawals from state 529 plans will be tax-free if the money is used to pay for qualified education costs. A few common qualified education expenses include:
- Tuition (K-12 and College)
- Books and supplies
- Computers and software
- Room and board
- Student loan repayment
Tax Advantages
There is no up-front federal tax deduction for money put in a 529 plan, although some states allow you to deduct contributions on your state tax return. Money builds up tax-sheltered until withdrawn to pay tuition or other educational expenses. Withdrawals from state 529 plans are completely tax-free.
Gift Tax Benefit
The normal limit on tax-free gifts is $17,000 per gift per year. Section 529 allows you to bunch five years of tax-free gifts into one year. Each donor can give $85,000 tax-free to fund a 529 plan—$170,000 in total from a married couple—every five years.
Interested in the potential of a 529 plan? Provident offers a full range of Investment and Retirement Planning services. Seek the guidance of a Provident Financial Consultant021 by calling (800) 656-4096.